These 4 Measures Indicate That XIANGPIAOPIAO FoodLtd (SHSE:603711) Is Using Debt Reasonably Well

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies XIANGPIAOPIAO Food Co.,Ltd (SHSE:603711) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for XIANGPIAOPIAO FoodLtd

How Much Debt Does XIANGPIAOPIAO FoodLtd Carry?

As you can see below, XIANGPIAOPIAO FoodLtd had CN¥936.5m of debt at September 2024, down from CN¥1.03b a year prior. But it also has CN¥2.65b in cash to offset that, meaning it has CN¥1.72b net cash.

How Strong Is XIANGPIAOPIAO FoodLtd's Balance Sheet?

According to the last reported balance sheet, XIANGPIAOPIAO FoodLtd had liabilities of CN¥1.56b due within 12 months, and liabilities of CN¥89.2m due beyond 12 months. Offsetting these obligations, it had cash of CN¥2.65b as well as receivables valued at CN¥26.8m due within 12 months. So it can boast CN¥1.03b more liquid assets than total liabilities.

This excess liquidity suggests that XIANGPIAOPIAO FoodLtd is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that XIANGPIAOPIAO FoodLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

In fact XIANGPIAOPIAO FoodLtd's saving grace is its low debt levels, because its EBIT has tanked 23% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine XIANGPIAOPIAO FoodLtd's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. XIANGPIAOPIAO FoodLtd may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last two years, XIANGPIAOPIAO FoodLtd actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While it is always sensible to investigate a company's debt, in this case XIANGPIAOPIAO FoodLtd has CN¥1.72b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥349m, being 156% of its EBIT. So is XIANGPIAOPIAO FoodLtd's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 3 warning signs we've spotted with XIANGPIAOPIAO FoodLtd (including 1 which doesn't sit too well with us) .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.